Proposed Consensual Debt
Restructuring Rules for
consideration by Credit Industry
under the Section 48(1) Industry
Code of Conduct to Combat Overindebtedness
ANNEXURE E
May 2010
National Credit Regulator – Debt Review Task Team
Page 1
Annexure E – Proposed Debt Consensual Restructuring Rules for consideration by Credit Industry
under Section 48(1) Industry Code of Conduct to Combat over-indebtedness
© 2010 Confidential
TABLE OF CONTENTS
1.
RULES PROPOSAL
1
2.
APPLICATION BY CONSUMER TO EXIT THE DEBT REVIEW
5
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OVERVIEW1
The following debt restructuring rules are proposed by the NCR task team for
consideration and adoption by the Credit Industry to respond to ongoing concerns
related to the present rules of the NDMA arising from debt counsellors, debt
counsellor system service providers, banks and the regulator. Such concerns
relate to:
•
The complexity of the rules;
•
Ongoing difficulties to attain consistent interpretation;
•
Ongoing difficulties in obtaining system alignment with Debt Counselling
System Providers and the NDMA due to the above mentioned;
•
The treatment of secured debts (payment holidays on mortgages);
•
The extension of contractual terms on very high yielding unsecured debts.
These proposals attempt to address these concerns and retain a comparable
solve rate through consent agreements.
1. RULES PROPOSAL
1.1.
RULE 1: ALLOCATION OF AFFORDABILITY
It is proposed that a fixed proportional allocation of the amount available 2 in terms
of the Affordability Assessment3 conducted by the Debt Counsellor be made to
each Credit Agreement calculated as the deemed contractual repayment on that
agreement on the date of restructuring as a proportion to all the contractual
repayment obligations4.
As and when any of the debts are repaid during the implementation of the plan,
the amount available for repayment as a result of the settlement of a debt is
1
2
3
4
Due to concession in excess of those allowed in law, consent to repayment plans based on these rules
is a prerequisite and such consent levels can be enhanced by the adoption of such rules under the
constitution of the NDMA.
The amount available is referred to as the affordability which is defined as the consumer’s income less
reasonable expenses less debt counselling fees and payment distribution costs.
Affordability Assessment means the guidelines proposed by the Debt Counsellors Association of South
Africa and accepted by the NCR.
The amount available for debt repayments should be a fixed amount per month which is subject to a
reasonable annual increase (or any other voluntary increases by the consumer to accelerate
rehabilitation) and should be collected via the Aedo or Naedo collections method or where possible
through payroll deduction arrangements.
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proposed to be cascaded5, in the same proportion of the deemed contractual
repayment obligation, to the remaining Credit Agreements.
Deemed contractual repayment should be defined as follows:
1.1.1. Where there is a contractual instalment in relation to the debt, the
amount of the instalment as determined by the contract, net of any
non-credit related fees, insurances or other charges. Insurances are
to be treated as essential expenses in the Affordability Assessment.
1.1.2. On Credit Cards the monthly repayment amount will be calculated
based on a 24 month repayment period of the outstanding capital at
the ruling rate (including if applicable the monthly service fee as per
the NCA) for the credit card. This includes amounts due in terms of
budget facilities as well and normal credit card debt (straight facility).
1.1.3. On all overdraft and revolving credit facilities, a monthly repayment
amount will be calculated based on a 60 months repayment period
of the outstanding capital at the ruling rate (including if applicable the
monthly service fee as per the NCA).
1.1.4. On Store Cards a monthly repayment amount will be calculated based
on a 12 months repayment period of the outstanding capital at the
ruling rate for the store card rate (including if applicable the monthly
service fee as per the NCA).
1.1.5. On all incidental credit a monthly repayment amount will be calculated
based on a 12 month repayment period of the outstanding capital at
the ruling rate for the incidental credit agreement.
1.1.6. Any credit agreement where the contractual repayment amount to
repay the debt in full is not defined as set out above a monthly
repayment amount will be calculated based on a 60 months
repayment period of the outstanding capital at the ruling rate for the
agreement.
1.2.
RULE 2: REDUCTION IN INTEREST RATE
Once the amount per credit agreement has been allocated in terms of Rule 1 a
test for possible solve6 is conducted and where the terms falls outside the agreed
Repayment Term Guidelines set out in Rule 3 the process of rate reduction is
proposed to commence. For this purpose the rate and service fee contractually
5
6
Cascading means that the amount released as result of repayment of a debt should be reallocated
proportionally to the remaining credit agreements and settlement of any debt during the implementation
of the plan will therefore not reduce the consumer’s monthly repayment obligation under the repayment
plan.
A solve is defined as and when all the debt under the proposed re-arrangement agreement will be
settled within the Repayment Term Guidelines taking into account the concessions by Credit Providers
and including the effect of cascading of settled debt repayments as well as annual escalations as
defined in Footnote 4.
payable will be converted to a fixed contractual yield expressed as an interest
yield.
1.2.1. Rate reduction steps:
(a) Step 1: Reduce the yield on all credit agreements to the ruling
Bank Repo Rate7 X 2.2 plus 10 percent. After this yield
reduction a solve test should take place. If the repayment plan
does not solve proceed to Step 28.
(b) Step 2: The yield on all credit agreements is reduced to the
ruling average Prime Rate9. After this yield reduction a solve test
should take place. If the repayment plan does not solve proceed
to Step 310.
(c) Step 3: The yield on all credit agreements is reduced to the
Bank Repo Rate. After this yield reduction a solve test should
take place. If the repayment plan does not solve proceed to Step
411.
(d) Step 4: The yield on the unsecured debts should be reduced to
50% of the prevailing Repo Rate and on secured credit
agreements the rate should be kept at the Repo Rate. After this
yield reduction a solve test should take place. If the repayment
plan does not solve proceed to Step 512.
(e) Step 5: The yield on all unsecured debt should be reduced to a
zero rate. After this yield reduction a solve test should take place
as. If the repayment plan does not solve it is proposed that Rule
4 will apply to unsecured debts13/14.
Once Credit Providers have accepted the proposed reduction of yields for the
repayment period, as per the proposed repayment, and a Court Order has
been obtained confirming the arrangement Credit Providers should adjust the
agreed rate on their systems during the agreed repayment period. Statements
issued by Credit Providers to consumers should reflect this arrangement as
well as repayments made in terms of this arrangement.
7
8
9
10
11
12
13
14
Bank Repo Rate means the Repo Rate charged by the South African Reserve Bank.
Should the contractual yield be less when Step 1 is implemented the contractual yield does not change
and would apply in the solve test.
Average Prime Rate means the average prime rate charged by ABSA Bank, First Rand Bank, Standard
Bank and Nedbank.
Should the contractual yield be less when Step 2 is implemented the contractual yield does not change
and would apply in the solve test.
Should the contractual yield be less when Step 3 is implemented the contractual yield does not change
and would apply in the solve test.
Should the contractual yield be less when Step 4 is implemented the contractual yield does not change
and would apply in the solve test.
The implementation of Rule 2 can result in the repayment of certain debts over terms lower than the
maximum term extension guidelines due to the fixed proportional allocation of available cash.
Should the contractual yield be less when Step 5 is implemented the contractual yield does not change
and would apply in the solve test.
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1.3.
RULE 3: TERM EXTENSION GUIDELINES
The following term extension guidelines are proposed to be used to test
proposed repayment plans for a solution15.
1.3.1. Home loans repayment period can be can be extended by up to 240
months from proposal date, subject to a maximum limit of 360
months from the home loan inception date16.
1.3.2. The Vehicle loan repayment term can be extended to one and a half
times the original term up to a maximum of 84 months from inception
date.
1.3.3. The repayment term on Credit Card, Store Cards, Overdrafts and
Personal Loans with contractual terms exceeding 12 months, shall
be no more than 60 months from date of repayment proposal.
1.3.4. For Micro Loans where the repayment term is less than 12 months, the
maximum repayment period is 3 times the contract term.
1.3.5. All other debt the maximum repayment period should not exceed 60
months from date of proposal.
1.4.
RULE 4: CAPITAL REDUCTION
1.4.1. Where a repayment proposal does not solve in terms of Rule 2 Step 5,
all unsecured credit providers are proposed to conditionally 17 accept
the repayments in terms of the proposed repayment plan including
the effects of cascading and escalations as a full redemption of the
debt.
1.4.2. The effect of Rule 4 would be that if the consumer meets the
obligations in terms of the repayment plan, capital not repaid in
terms of the repayment plan after 60 months or the expiration of the
term in the case of micro loans would be set aside (written off and
forfeited) by the Credit Provider, in the interest of the consumer
rehabilitating into the credit market after expiry of the repayment
term guideline maximum period.
15
16
17
For clarity it is noted that the rescheduled repayment term and rate concessions is proposed to
commence from date of repayment proposal under the debt re-arrangement plan, allowing for certain
unavoidable delays at commencement such as payment of debt counsellor and legal fees. COB
balances therefore are proposed to be adjusted accordingly to formulate the debt re-arrangement plan.
The home loan inception date should be the last date on which a loan was approved and paid out.
Conditional acceptance refers to the right of the credit provider to enforce the full contractual obligations
of the consumer in the event that the consumer defaults on the concessionary payment obligations
under the debt repayment plan.
2. APPLICATION BY CONSUMER TO EXIT THE DEBT REVIEW
A consumer can apply to exit the debt review by obtaining a clearance certificate
from the Debt Counsellors as per Regulation 27 of the NCA if the consumer has
complied with the Court Order and can resume repayments in terms of the
original contractual obligations of all the remaining Credit Agreements, taking into
account the concessions agreed by the Credit Provider18.
18
Consumers will be encouraged where possible in annual reviews to accelerate payments over and
above the amount stipulated in the Court Order to a point of settlement in terms of the Court Order.
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